Communist Landlords: CCP's Game-Changing Move into Real Estate and the Impact on Housing Dynamics

hi thank you for watching diing to channel I'm D Shan if you have not done so already please subscribe to my channel thank you very much in comparison to the approach taken for the stock market it is clear that the Chinese Communist party is more actively involved in addressing the real estate sector first tier cities like a guango and shanan have recently embarked on Urban Village Renovations with support from the Central Bank introducing a housing te ticket system following this trend second tier cities have also received attention from the Central Bank The People's Bank of China recently approved a 100 billion yen housing rental group purchasing loan backing eight pilot cities in acquiring commercial housing for long-term rental purposes these eight pilot cities include tenin Chu ch ch F CH and Gan all exclusively second tier cities in simpler terms the central bank has allocated 100 billion yen to the local governments of these eight cities enabling them to purchase commercial housing for long-term rental use the policy loans offered by the Central Bank features remarkably low interest rate with a maximum of just 3% and an extended repayment period for up to 30 years consequently if local governments can generate a rental return of over 3% on the purchase to properties the annual interest will suffice to cover the expenses making the repayment of the principal amount unnecessary given the 30-year term it can be seen as akin to a Perpetual Bond what consequences might arise in the real estate market due to the central bank's policy will housing prices find stability or is a further decline expected how will local governments creatively utilizing their roles as landlords additionally what potential risks are concealed behind implementation of this policy initially it's essential to grasp the rationale behind the central bank's introduction of this policy essentially the central bank's mindset is a straightforward with its ultimate objective consistently centered on preventing systemic Financial risks the livelihood of the general public is not the primary concern at the present the real estate sector is is still grappling with issues primarily stemming from the difficulty real estate companies face in selling their properties it's likely still fresh in everyone's memory that the Central Bank continuously urged the banks last year to treat all entities equally and provide loans to real estate companies as needed however Banks had already become cautious about the real estate companies due to risk control measures they were hesitant to invest further in the real estate sector faced with this situation the Central Bank realized that mere appeals were in effective considering banks are not charitable institutions so what was the solution change the borrower if banks were unwilling to land to real estate companies the alternative was to extend loans to local governments with these loans local governments could acquire unsold properties from real estate companies leasing them out generate a rental income and use that income to repay the long interest following this trend of thoughts the central bank has introduced a dedicated leasing loan when commercial Banks borrow funds from the Central Bank the associated cost is 1.75% following this when the Central Bank extends loans to local governments the interest rate can reach up to 3% with a maximum repayment period of 30 years the Lan amount is kept at 80% of the assessed project value resulting in an exceptionally High mortgage rate it's clear that the central bank has conducted calculations based on rental yield with 3% representing the rate at which the Central Bank believes local government should be able to achieve in terms of rental returns the 30-year long-term implies that the Central Bank may not have intended for local governments to for repay the principal amount let's explore how these eight pilot cities might employ this loan to obtain this loan the initial step is certainly to identify a project the local government's primary focus for acquisition would be the properties developed by its own investment platform companies if you explore cities across China you will likely find many developments by these City investment companies which serve as a financing platforms for local governments when seeking this leasing loan from the Central Bank these companies would be the entities involved thus the first priority is to address the properties held by these companies now let's tackle the second question how to go about acquiring these inventory properties and at what pricing strategy will it be based on Market rates cost price or perhaps selling at a loss this presents an opportunity for analysis let's delve into a hypothetical scenario if City A's Municipal investment company has limited inventory properties and it needs to procure houses from other developers would they engage in tough negotiations possibly driving a hard bargain I believe they would and there might even be dual contract contracts in play the officially stated acquisition price may be one figure but in practice developers could find them themselves returning a portion of the received funds the purpose of these dual contracts is likely for long deception the funds returned by the developer could then be redirected by the local governments to settle debts constituting the first situation another scenario unfolds in City B where the municipal invest company holds a substantial inventory of properties over the past couple of years CB strategically had its Investment Company acquir numerous plots at high prices to support land values this has led to an overflow of properties in the possessions of City Investment Company creating a challenge in selling them in response City B will spare no effort to assist its Investment Company in clearing the Surplus inventory they would seek as much funding from the bank as possible aiming for a substantial amount however this approach comes with a drawback aside from the local local governments Investment Company other real estate developers receive no Aid and may still face Financial challenges now let's contemplate the impact of local governments transition into landlords on housing prices firstly focusing on the rental market the influx of properties into the hands of local governments for leasing purposes is bound to increased available housing stock consequently this surge in supp is likely to exert downward pressure on rental prices considering the existing challenges in the job market rental rates are expected to decline it's crucial to acknowledge the significant Authority held by the Chinese government once it intervenes in the rental market or in the citizens May face formidable competition given the government's substantial influence and resources allow me to provide an example to illustrate local governments have the authority to mandate that all public servants employees in public institutions and the staff of state-owned Enterprises must rent government-owned housing if they seek accommodation the rent could be deducted directly from their salaries or units could receive a modest subsidy from their respective organizations implementing such measures is within the government's reach and it can even allocate the rental targets for various units for instance a particular Hospital might be required to achieve a target of renting out 100 units while another department must fulfill a target of 200 units therefore when local governments transition into the role of landlords this kind of approach becomes quite feasible although the government's properties are likely to attract tants it could spell bad news for ordinary citizens in the future IND individuals may find it a challenging to secure tenants for their own properties as the government has essentially monopolized the rental market if people are unable to earn rental income from their properties there may be an increased tendency to sell contributing to a further decline in housing prices if you find the previous ex explanation unclear there is a broader perspective to consider the future demographic Trends in China over the next two decades as we are aware the number of newborns has been on the decline in recent years contributing to an aging population many young individuals are embracing a more laidback lifestyle opting not to marry and have children this shift is not solely a response to economic conditions but also reflects a prevalent social attitude perhaps even a trend despite current government initiatives in terms of promotion in encouragement and policies they appear to have limited impact on altering this trajectory so what can we anticipate in the next 20 years as the baby boomer generation gradually diminishes their children the Millennials who are often the only CH child in their families will inherit at least two or three properties from their parents even if these individuals can reside in homes beefed by their grandparents each Urban Family is a like to have one or two vacant properties without occupants peering to the Future the generation she the Generation X is increasingly opting not to marry and have children in an era where nearly every family possesses vacant properties if the government assumes the role of a landlord will your house still command a good selling or rental price with an existing surplus of houses and taking into account the anticipated decline in China's total population two decades from now it's a matter worth contemplating let's revisit the central bank's policy in this instance the central bank has allocated a loan quarter of 100 billion yen to eight pilot cities how many houses can this sum actually purchase unfortunately the funds are quite limited akin to a drop in the ocean these eight pilot cities are predominantly second tier cities with relatively High property prices let's take Jung Joe as an example given its prevailance of Unfinished property projects and comparatively lower prices how many houses could 100 billion yen Buy in Jung assuming a rate of 10,000 Yen per square meter it would be roughly around 100,000 units however Jung Joo has approximately 106 unfinished property projects and over 200,000 families have acquired these incomplete property thus even if the entire 100 billion un is directed to Jung Jo it only it can only address half of the unfinished homes not to mention other unsold properties additionally there are seven more cities sharing this 800 billion yen therefore the allocated funds fall significantly short it can only be seen as an experimental Endeavor if expanded Nationwide the central bank's printing press might need to operate incessantly h I speculate That central bank has likely collaborated with local governments the funds are primarily aimed at resolving issues with local city investment companies ultimately assisting local governments in stabilizing their local debts other real estate companies facing insolvency might not be the central bank's primary concern as long as local debts remain manageable the reputations of local governments can be upheld fulfilling the central bank's objectives finally fin considering the banking perspective let's explore an additional aspect for contemplation typically Banks evaluate the value of a property based on two Dimensions one being its potential resale value however for government own the long-term rental properties explicitly designated as a nons salable attention shifts to the rental yield it might not be widely known that when Banks use properties like commercial space or offices as collateral their assessment is more focused on the rental income generated rather than the potential sale value the loan amount provided by bank is generally around 10 times the rental income therefore in the case of government long-term rental properties assuming a rental yield of 3% even though 3% could be an optimistic estimate considering China's rental market conditions the property's manageable value the the property's mortgageable value in the eyes of the bank would be around 30% to illustrate for a property the government acquired for 1 million the bank would typically extend a loan of approximately 300,000 yet examining the special loans issued by the Central Bank reviews a requirement for banks to extend loans with an 80% loan to value ratio a loan initially set at 300,000 is promptly increased to 800,000 consequently this essentially amounts to providing funds to the local government without taking risks into account the central bank has earmarked funds for this purpose precisely because banks are typically reluctant to undertake such high-risk transactions I aim to illustrate the significance of the long to uh the long to Value ratio highlighting the substantial risk exposure inherent in the business Banks drawing from their extensive Landing experience have established a 30% loan to value ratio with a solid foundation however once elevated to 80% the likelihood of these loans resulting in losses becomes notably high in essence this specialized loan serves as a gift to the local government with a considerable chance that they may not even consider repaying the interest commercial Banks already hold a significant volume of loans from local governments that have a history of not paying interest and adding another potentially non-performing loan doesn't bother them for commercial Banks given that this money originates from the Central Bank the outcome of the loan has minimal impact on them they won't directly bear the losses so they are unlikely to be overly concerned by now you should have gained an understanding of the constrain the repayment capacity of local governments essentially the central bank's policy represents a CO form of fiscal deficit monetization merely taking a different route and adopting a different guise anticipate more instances of this nature in the future leading to an increased frequency of money printing by the central bank this year China's economic regulation leans heavily on fiscal policy Rel NE ating the central bank to the role of a money printing machine for fiscal purposes signaling a considerable decline in its standing thank you for watching please leave a comment and subscribe to my channel just click the Subscribe button right here I'll See You Again shortly until then be well